FOREX-Euro recovers to trade higher ahead of ECB meeting

Mon Jan 7, 2013 11:32am EST

Related Topics

* Euro gains vs dollar ahead of ECB meeting on Thursday

* Dollar/yen retreats from Friday's high after swift rally

* Could fall further if BOJ does not meet expectations

NEW YORK, Jan 7 (Reuters) - The euro rose against the dollar on Monday as investors positioned ahead of a European Central Bank meeting later in the week, while the U.S. currency retreated from a 2-1/2 year high against the yen as investors bet the recent move was too far, too fast.

Without U.S. economic data to drive the New York session one way or another, currencies are likely to remain in the day's ranges with a view to events later in the week or react to changes in other asset classes such as stocks.

The euro's move higher was given added impetus by headlines that Silvio Berlusconi will not stand as candidate for prime minister in next month's Italian election under the terms of a coalition deal with the Northern League..

The price climb then accelerated after the single currency broke technical resistance.

"We broke resistance at $1.3085 and are range trading between $1.2980 and $1.3120," said Tommy Molloy, chief dealer at FX Solutions in Ridgewood, New Jersey.

"It's actually a ho-hum day with nothing until later in the week."

The euro rose 0.3 percent against the dollar to $1.3105, well above last week's three-week low. Trade was volatile, with the session low at $1.3016 and the peak at $1.3112.

Analysts cautioned that despite the move higher, the euro was more likely to remain pressured as markets refocus on the euro zone's debt crisis and before the ECB meeting. Any indication of monetary stimulus or comments on economic weakness could push it lower.

"While the Bank indicated its willingness to lower interest rates this year, we do not anticipate a rate cut at this week's meeting as price pressures have increased with core inflation picking up slightly," said Eric Viloria, senior currency strategist at Forex.com. "As economic activity continues to contract, we think that the ECB will eventually lower rates in the coming months."

Some $3.54 billion in euros changed hands through the global session on Monday, according to Reuters Dealing..

The dollar was down 0.4 percent at 87.81 yen, off Friday's peak of 88.40 yen using Reuters data, its strongest since July 2010. Traders said the dollar could extend its fall if it broke below reported stop-loss sell orders at 87.50 yen.

Expectations of aggressive monetary easing by the Bank of Japan has caused the dollar to rally more than 8 percent versus the yen since early December. The BOJ meets on January 21-22.

Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets in London, said there was a risk the BOJ's actions might fall short of market forecasts, leading the dollar to weaken.

"There is a risk that markets got a little bit carried away and that we don't see as much as we were hoping for (from the BOJ) and we see a pullback in dollar/yen."

Traders also said the yen found some support on worries that Japanese mobile operator Softbank Corp's deal to buy 70 percent of U.S. carrier Sprint Nextel Corp could run into complications.

The euro fell 0.1 percent to 115.11 yen, moving away from last week's 18-month high of 115.99 yen.

Late last week the dollar gained broadly after Federal Reserve minutes showing some policymakers considered ending their bond-buying stimulus as early as this year.

Further comments from two top Fed officials suggested on Friday that the central bank could halt its asset purchases this year.

Investors will also look at Spanish and Italian bond auctions toward the end of the week. Healthy demand could help the euro gain against the dollar.

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